Another reason many startup founders are young - salary | Hacker News Reader

Another reason many startup founders are young - salary

17 pointsjohnrob23 comments

A 22 year old founder can take a low salary, and not be too far from the market rate. What if the market rate for the founder is 300k? There is no way anyone would take anything near that much salary at a startup. The older you get, the bigger the sacrifice becomes. Now, maybe the older founder gets more equity, but any significant amount of equity is still pretty much an all or nothing payout. The younger founder gets a better deal - salary closer to market, same all-or-nothing equity.

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I was just thinking about this today. I was reflecting on how I'm giving up > $100K/yr. for a small but reasonable chance of making > $2m in ~2 years.

I agree that the opportunity cost is higher for older founders, but (as others have observed) so is the probability of success, at least vs. non-YC younger founders. It's also true that, if you are willing to live like a grad student, you can mitigate your risk by doing consulting/contract work beforehand or on the side. So could a 23-year-old, of course, but for a variety of reasons they usually don't bill at nearly as high a rate. I don't have to work very long at $100-125/hr. before I've got a year's living expenses saved up.

The real catch is if you have a family to support. I'm (un)lucky enough not to have that problem.

What do you do that you can charge $100-125/hr??

I don't know what he does, but if he's in the tech industry, it's probably consulting.

In general - the older you get, the more responsibilities you have (house payment, kids, etc). People with those types of responsibilities are generally more risk averse than those who are young and free (no kids, house payments, etc).

I started my current company when I was 26. I think back to that time (1999) and I didn't blink an eye when it came to the risk. I jumped in quickly, without worrying about it.

Now its 8 years later. I have a wife, a kid, a house payment, etc. I would definitely think a lot harder about making that type of move now. Obviously, my salary is higher (which is one aspect of it), but the big reason is that my obligations are much higher. If I miscalculated now, my family would suffer greatly.

So in general - I'd say younger people with less obligations and responsibilities, are more able to take that type of risk.

Are you assuming that every would-be 40-something founder makes 300k? That is rare.

Also, a company may be formed by tech people who get laid off and motivated out of necessity. What is the risk for them in this case?

This is called opportunity cost:

http://en.wikipedia.org/wiki/Opportunity_cost

Yes. But I guess my point is that you can't compensate for the opp cost with equity, because the reward is binary.

Theoretically, you could make one of those calculations like the one that says that a 50% chance at 2 million dollars is equal to a sure million dollars. To real-world proof it though, you'd have to factor in risk aversion.

That's called an expected value calculation:

http://en.wikipedia.org/wiki/Expected_value

I'm only pointing it out because I also want to note that it's a great way to determine if the contestants on Deal or No Deal are being boneheads.... ;-)

"older" isn't the relevant factor, and neither is market value.

First "market value". All other things being equal, someone who has a typical salary of 300k has a lot more opportunity to save for a couple of years of no salary and will find it easier to come back to a decent salary if the startup fails than someone who only makes 20k.

However, all other things are not equal. The relevant factor is overhead. Overhead is associated with age but isn't determined by age. For example, young folks supporting other folks have exactly the same problem as older folks supporting other folks.

Note that overhead is typically the result of choices and comes with benefits. Those with less overhead typically made different choices and don't get the benefits. Also, "young founders" are often delaying overhead.

Note that overhead contributes little/nothing to a startup's odds of success.

BTW - One could argue that the market actually undervalues not-yet-known-to-be-successful 22 year old founders.

My point does seem obvious after re-reading. What I really wanted to imply is that the current startup system basically penalizes experienced people. Is that a good thing? Is it even possible to change that?

I think you drank a bit too much kool-aid.

For young folks, there's little risk and opportunity cost but with zero experience likelihood of success is small.

For older folks, there's more risk and opportunity cost but with more experience and connections likelihood of success is greater.

This isn't a penal system, this is a distribution system. Being young isn't the prerequisite to success. Everyone harps and focuses on it because of that trait is unique (remember, likelihood is small) in an otherwise older folks dominated field (remember, likelihood is bigger).

The risk is higher for younger people.. and yet so many more younger people are successful? Hm.

The startup ecosystem does seem biased towards younger folk, but I dunno if I'd say it "penalizes" older founders. I think people make choices throughout their career, and those choices will change the payoffs for future choices. As you get older, your choices have less potential impact, because there's less time left in your future.

This only applies if you have optimized your career around being an employee, though. Someone who makes $300K/year obviously has, and has picked up quite a few skills on being productive and navigating office politics. But a 50-year-old homeless bum who just got his life back together faces the same incentives as the 22-year-old startup founder - perhaps even moreso, because employers will look at a gap in work experience with suspicion.

And it seems like many of the businesses started by older founders fit this pattern - either they've just been fired and lost everything, or they're housewives returning to the workforce, or they're senior citizens looking for a career change. Once you've got nothing to lose, you've got everything to gain.

I always considered being "founder" status to indicate you have NO salary. At least in the early stages. You pay your bills, then every dime you have left you put back into the company. Basically, the startup is your life, with all of your financial incentives being driven by your equity ownership.

But maybe you are referring to early startup employees? I can see what you say being the case in that type of situation, where salary is typically low in exchange for more equity.

Not speaking from experience, but I believe that it's very common for founders to pay themselves a modest salary once they have received funding.

I could see that being the case, especially after VC funding. I guess I would just personally have a problem with that, knowing I was increasing the burn rate of the company I'm trying to build. That money could be used to hire another good hacker.

But I'm not speaking from experience either.

You could burn yourself out much faster with a $0 salary over a number of years though.

If the market rate for the founder is 300k then it's all the better for the founder. The problem is if the founder's burn rate is also close to 300k / year. Otherwise the founder making 300k per year can hopefully save up a decent amount of money quickly and perhaps bypass the need for angle funding.

Your "market rate" argument assumes that this year's compensation is the primary motivator.

Very often not the case.

I think this is somewhat in line with how it seems Noble-prize winning research happens when the winner is a grad student...

and by salary you mean - no family/spouse to support.

There are tons of reasons why more people are more successful when they're young. God, getting old is depressing.

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